Hedge funds have lost $43 billion trying to short the market as the S&P 500 eyes its best month in over a year

• Hedge fund short sellers have lost $43 billion in recent days as stocks rally, the Financial Times reported.

• Analysts said the surge in markets triggered a short squeeze that weighed on some firms.

• The S&P 500 is on track for its best month since July 2022.

Stocks have enjoyed a red-hot November, and the recent rally has left some hedge funds with an estimated $43 billion in losses after betting on equities to move lower, according to a Wednesday Financial Times report citing data from S3 Partners.

Hedge funds and money managers that have tried to short US and European equities — that is, bet on stock prices falling — have been caught off guard as the market has rallied this month as investors grow optimistic that the Federal Reserve is finished raising interest rates.

With a more than 7% gain in November, the S&P 500 is on pace for its best month since July 2022.

Some institutional investors had built up short bets against companies they thought would buckle amid the higher-rate environment. However, with confidence returning to markets, some of those trades aren’t panning out.

The FT notes that analysts say some hedge funds have had to repurchase stocks to cover their short bets as a “short squeeze” pushed share prices even higher.

According to S3 data, bets against technology, healthcare, and consumer discretionary were the most painful for hedge funds. Painful trades in the month include Carnival Corp, which jumped 14% in the week before Monday and cost short sellers about $240 million.

To that point, a Goldman Sachs index that tracks the S&P 500 names with the highest total dollar value of short interest outstanding is on pace for its best month since last October.

Meanwhile, on Tuesday, strategists at DataTrek Research pointed to US large-cap sector correlations as reason to believe stocks will continue to move higher through the end of the year.

“When [investors] see clear skies ahead, correlations tend to be low as they pick and choose between individual sectors and stocks,” the firm’s cofounders Nicholas Colas and Jessica Rabe said. “When investors are concerned that a recession is brewing, whatever the cause, correlations are high because they see too much risk in owning equities as an asset class. Everything gets sold in such an environment.”

“The bottom line here is that we believe US equities will continue to rally in the coming weeks,” the strategists maintained.

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